Sovereign gold bonds 2020: Subscribers can avail of tax benefits. Should you buy?

has been fixed on the basis of simple average of closing price for gold of 999 purity of the past three business days preceding the subscription period (January 08-10, 2020). This data, published by the India Bullion and Jewellers Association Ltd (IBJA), works out to Rs 4,016 a gram.

HDFC Securities, a brokerage, said investors must see SGBs more as a tool to diversify assets rather than an instrument to earn superior returns.

Their reason? “Although investors in some of the past tranches are currently traded in the negative, one needs to appreciate that gold prices are prone to fluctuations based on macro events globally and US dollar-rupee rates,” said HDFC Securities in a note on Tuesday.

The brokerage advised investors who are underinvested in gold or have regular fresh monies for allocation in various asset classes or need to accumulate gold for wedding or other auspicious occasions to choose a systematic investment plan (SIP) in every tranche of gold.

Jitendra Solanki, a Sebi-registered investment expert, said gold bonds are a good option for retail investors and better than physical gold.

“Every investor should allocate 6 to 10 percent of their portfolio to gold as the yellow metal works as a hedge. Benefits such as regular interest income, capital gain tax exemption (on maturity), sovereign guarantee, and liquidity and appreciation value make gold bonds attractive investment option.”

Anuj Gupta, deputy vice-president — Commodities and Currencies at Angel Broking, said investors should keep a certain portion of their investment in gold because the metal can hedge against uncertainty and has always given good return in the long run.

Guarantee: SGBs hold a sovereign guarantee, hence there is no default risk involved.

Discount: The issue price of the gold bond has been fixed at Rs 50 discount on nominal value for per gram for digital applications. HDFC Securities said that this discount will help investors get slightly higher returns over buying gold from the spot market.

Returns: SGBs deliver two streams of returns. One, regular interest of 2.50 per annum on invested capital every six months and two, capital gains at the time of redemption in case the price at the time of redemption is higher. Interest will be credited to the bank account of an investor in every six months.

Collateral: SGBs can be used as collateral for loans. This bond is as liquid as physical gold and could be exchanged for money at the time of financial need. These bonds will be available both in demat and paper form.

In Union budget 2016, then finance minister Arun Jaitley provided capital gains tax exemption on redemption on such bonds. Indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.

Residents of India, individuals, HUFs, trusts, universities, charitable institutions and minors can apply for sovereign gold bonds. For children account, guardians have to apply.

The investors can buy minimum of 1 gram and maximum of 4kg (individuals/HUFs). However, trusts can buy up to 20 kg in a financial year (April-March).

The tenure of the bonds will be for a period of eight years with an exit option after 5th year of the date of issue.

Gold bonds will be redeemed for cash at the end of the investment tenure. Redemption will take place at the prevailing gold price based on simple average of closing price of gold of 999 purity of previous three business days from the date of repayment.